The Fed stokes up recovery

AS far as the US Federal Reserve is concerned, the era of low interest rates is with us for some time. The Fed's main worry remains deflation, so it sees no need to raise borrowing costs, currently 1%, for the time being.

This will be music to the White House's ears as it looks towards next year's elections. George Bush's pump-priming has already set the American and global economy back on the path to recovery and low rates are helpful. US consumer confidence is on the mend. Even the moribund German economy is showing signs of life with a rise in the Ifo index, which measures business sentiment.

But the best evidence is to be seen in the real world of business. Sir Martin Sorrell, chief executive of WPP, expects 3% to 4% growth in global advertising over the next year, lifting the industry out of its long recession. Advertising is a good forward indicator and WPP itself looks reasonably well placed to take advantage, having snapped up Cordiant and Tempus during the downturn.

Then there is the return of the takeover. Until recently, healthcare was the centre of action. Now the action is moving to more difficult sectors. The Brown & Williamson/R J Reynolds deal is the kind of transaction that can be done only in robust markets because of the legal complexities for tobacco. The return of bank mergers, blazed by the Bank of America/Fleet deal, suggests that after the telecoms bubble, the balance sheets of the major banks are now repaired.

When US banks are looking inward, London-based HSBC continues to look outward for acquisitions, buying Bank of Bermuda and Lloyds TSB's Brazilian interests.

All of this, and the investment banking beauty contest which is developing for the management of the Google float, suggests that Wall Street has put its difficult times behind it.

The big houses have weathered the analyst scandals, but only in the past few months have mergers returned. The health of investment banks may seem of more importance to those who work in them than to the broader economy.

But it is worth remembering that among the reasons tax revenues have come under pressure on both sides of the Atlantic is the weak performance of the financial sector and the lack of opportunity for fee income, bonuses and capital gains.

So a bull market may yet be a lifeline for Gordon Brown and for John Snow at the US Treasury, both of whom face yawning budget deficits.

City conflict THE Financial Services Authority is finally having its Spitzer moment. But instead of lining up all the investment bank chieftains in one room, the state's attorney generals in the next and threatening to unleash the attack dogs unless the banks admitted conflicts of interest, the FSA is adopting a kinder and gentler approach.

This could reflect the fact that the FSA has found no evidence of conflict in the City. Or it could point to a pusillanimous approach to regulation.

We know from the FSA's press notice that it has indeed found conflicts. The regulator's research found 'there has been positive bias in research recommendations where clients covered were also clients of the investment bank'.

So we know there has been behaviour which the Americans would regard as wrongdoing. Indeed, allegations of inappropriate behaviour at stockbroker Collins Stewart are still part of an 'ongoing investigation' by the FSA.

The idea that the City is as white as snow is clearly nonsense. That is why the FSA has decided to make 'senior managers' at City firms responsible for coming up with tougher rules regarding conflict and to hold them accountable if breaches are found.

The new rules will exclude analysts from roadshows or sales pitches, require disclosure of analysts' dealings in shares they write about, and seek an end to privileged allocation and pricing of shares for friends and families.

All of this is sensible. But one fears the whole timetable is too leisurely. It will not be until the end of this year that final consultations are completed, and midway through 2004 that the new rules are implemented.

When it does come into force, will the compliance culture inside City houses be strong enough to prevent abuse? One suspects that in the large American houses, where conflicts produced heavy fines, no one will be straying very far.

But for those whose feet have been held to the fire by Elliot Spitzer, the FSA's approach will look like a pushover.